Regulation and Trust, the New RevolutionTue, 03/21/2017 - 13:15
Entrepreneurs are disruptive in the most unimaginable ways. It is no surprise that the business model of kubo.financiero, a fintech startup, is based on three unusual aspects: technology, regulation and trust. Vicente Fenoll, CEO and Founder of kubo.financiero, says the disruption caused by companies such as his is a result of an entrepreneur’s DNA. “As entrepreneurs, we need to think in business models entirely different to that which we know.”
Through a digital marketplace, the company puts investors or lenders in direct contact with borrowers, which Fenoll says is a kubo.financiero innovation. “As an investor, you can choose in what project to invest. You have access to the person’s history and project and decide whether to invest with them or not,” he says. However, there is a catch. All loans are made without a guarantee of payment, making trust and very complex mathematic algorithms the investors’ best bet to get paid. “The only guarantee our investors have of being paid back is that the person that they are investing in has a history of complying with payments,” says Fenoll. That is why kubo.financiero rejects almost 92 percent of the loan applications it receives.
The rejection rate is based on risk, as calculated by the company’s algorithms. “We use very complex mathematical models to assess risk. Our algorithms analyze information from the credit bureau, third parties, behavior on the platform and information people provide us. They then determine if companies qualify to be in our platform. Our algorithms even establish payment plans as well as interest rates,” Fenoll says.
While mathematics and algorithms are kubo.financiero’s first security filter for its investors, to provide an extra degree of safety they suggest what any other good investors does: diversify their portfolio. “We do not tell investors where to put their money, but we do urge them to invest in at least 200 different projects (on average more than 400). This way, if a lender fails to pay, then investors do not lose all their money,” says Fenoll. “A typical investor account at kubo.financiero totals MX$80,000 allocated to 400 or 500 projects, but we have people participating with MX$5,000 in 100 projects.”
However, kubo.financiero would not be the successful model it is without the technology component. “Our technologic proposal is managed to generate price differentials that favor both investors, with higher rates of return, and borrowers, with lower interest rates.” This means that while a traditional investment in a bank yields an average rate of around 2-4 percent, kubo.financiero offers an average 13.8 percent. Interest rates for borrowers are also decreasing. Fenoll says that on average, clients pay 39 percent. In 2012, when the company launched, borrowers were paying a 47 percent interest rate.
Bolstered by its technological component, kubo.financiero’s value proposition helped attract US$7.5 million in an investment round in August 2016, which Fenoll says represents trust in the company, the fintech business model and the management team. He is confident that kubo.financiero is poised to continue growing to reach 10,000 users and 1,500 investors in 2017.
The third element of kubo.financiero’s business equation relates to regulation. Fenoll says many entrepreneurs believe that being disruptive means fighting against regulations. On the contrary, he says regulation has been a competitive advantage that has allowed the company to generate trust. It became the first company of its kind to be regulated by the CNBV in 2015. “It is true that regulations generate extra costs and procedures that are not always entirely efficient, but a regulated entity generates more trust, especially when you are handling money from third parties.”